Building the Muscle: Why Early Stage Startups Should Focus on Retention

How can your early stage company bolster retention metrics? High Alpha's Sr. Financial Analyst Tim Page shares tangible examples.

Article by
Tim Page

Like all early stage startups, the studio companies launched at High Alpha are focused on finding product-market fit from the moment the founders decide to launch the company. The founding team spends countless hours talking to potential customers to identify their pain points and build the company’s early sales playbook. However, if new sales come at the expense of a healthy customer base that can be retained, this can lead to downstream problems. 

Though it may not become apparent immediately, ARR growth will stagnate if churn becomes a problem and investors will view customer turnover as a lack of product-market fit. Some companies fall into the trap of not thinking about retention until the first renewal conversation comes up. Early stage companies can set themselves apart by focusing on retention during their first sales conversation - or even before!

Much has been written about Net Revenue Retention (NRR) in recent years, but a large portion of this content focuses on defining NRR or on tactics for later stage companies. Below are tangible examples of actions that High Alpha’s early stage companies have used to bolster their retention metrics.

Cross-Functional Outcome Focus

A major unlock that early stage companies can take advantage of is a genuine focus on customer outcomes. Why is the customer considering buying your product and how will your product lead them to the desired outcome?

This should be a central focus not only during the sales process, but also during the transition from the sales team to the customer success team. If the customer has spent weeks during the sales process communicating their desired outcomes, they will likely be frustrated if they have to start explaining the same thing to the customer success team after signing the deal. 

Early on, the founder is often playing the role of both sales and customer success, so the customer feels less of a transition once they have signed a deal. As the company starts to grow and build out the sales and CS teams, natural silos will start to emerge. Leaders can combat this by implementing handoff procedures that will make the customer feel that they are being served by one cohesive team that understands their needs which will drive affinity to the product and company.

Structure Pricing to Drive Upsells

Many of the blogs and content written about Net Revenue Retention center around pricing. This is for good reason! If contracts are not structured in a way that allows for the company to increase the contract value with customers, it is tough to drive Net Revenue Retention above 100%. Retention can be bolstered through price increases simply from graduating an early customer from beta pricing to standard pricing after year 1. However, these increases alone make it tough to overcome inevitable churn. Pricing mechanisms such as Usage-Based Pricing can unlock upsells and align pricing with customer value. 

Additionally, companies can drive revenue retention metrics by increasing pricing as a result of product and feature improvements. To do this, companies need to be thoughtful and strategic about whether those enhancements can be monetized and the best strategy to structure the pricing and packaging mix.

Push For Multi-Year Renewals

Customers have a higher propensity to churn if they have frequent buying decisions. Companies can guard against churn and minimize resources spent on renewal conversations if they can negotiate longer term contracts. This can be tough during the first contract as customers are typically taking a leap of faith to sign with an unproven startup. However, if they have been a satisfied customer for a year and the product is delivering value to the organization, they are more likely to agree to a contract renewal longer than one year which will minimize likelihood of churn. If customers balk at the idea of signing a multi-year contract with an early stage company, they can be more likely to sign a longer term contract if the company offers founding customer benefits or discounts that extend beyond one year.

Market to Existing Customers

Early stage companies spend much of their marketing budgets on marketing to potential new customers. However, investment in marketing to existing customers can pay dividends from a retention perspective as well. Early investment in building a brand can make customers feel like they are part of something bigger and therefore they are less likely to churn. Prior to being acquired by Terminus, High Alpha Studio company Sigstr invested heavily in building its brand which resulted in a user base with a strong sense of belonging and affinity to the product.

Additionally, continuing to communicate feature improvements to customers is key, especially in the early days. A company’s initial group of customers expects some initial value from the MVP, but they are also buying into the vision of what the product will become. Communicating key milestones along the product roadmap can keep them engaged and increase usage of the product. It is important to communicate what is being prioritized on the product roadmap and address feature questions head on as they arise. 

To take things a step further, companies can foster loyalty among an early customer base by giving them a seat at the table in advising the product roadmap. Customers are buying into the vision of the product, but that vision may vary from customer to customer. Connecting passionate customers together to discuss the product can allow them to have input on the roadmap which can make them feel that their opinions are heard.

Ideal Customer Profile Qualification Questions 

Before companies find true product-market fit, they will likely sign deals with multiple customer profiles that indicate early interest in the product. This is highly recommended as the company is in the learning phase and attempting to determine their ideal customer profile (ICP). As the Company adds more and more customers, it often becomes apparent that there are certain types of customers that just are not a fit for the early stage product. 

As the ICP is refined, developing a list of qualification questions during the sales process can help identify the customers that are not a fit and have a higher likelihood of churning. While it can be painful to pass on a potential customer early on, a disciplined company can avoid spending sales and customer success resources on a customer with a high probability of churning. If a customer falls into this category, the company should keep them warm as they could be a fit down the road when new features or product verticals emerge.

Post-Churn Winback Playbook

As a company starts to build out its go-to-market playbook, some lost customers are inevitable. There are a variety of reasons that customers will churn, but that does not need to be the end of the relationship. Customers can be won back in the future if they are approached appropriately. Below are a few examples of how customers can be won back after a churn event. 

Churn Due to Lack of Features

As mentioned above, early customers are buying into the promise of what the product will become over time. Sometimes a customer will sign an early contract, then realize the product isn’t driving enough value to re-sign due to a lack of features. If there is a key feature or set of features that is important to the customer, they can potentially be won back when the feature is built out if this is communicated to them. It is key for the company to document why the customer churned as it is easy to forget why a customer has churned. The team should then set a reminder to follow up when the desired feature is planned to be completed on the product roadmap.

Turnover of Customer Point of Contact

Employee turnover is inevitable and is more prevalent today than ever before. If a company’s main point of contact with a customer leaves, this can lead to questions around whether they will churn. However, if handled appropriately, turnover can lead to two selling opportunities: retention of the current customer, and a new opportunity at the company the point of contact leaves for. Turnover also highlights the importance of being “multi-threaded” at the customer, meaning the customer relationship is not limited to one point of contact. Companies should seek to build out a playbook for a customer turnover scenario that is tailored to their customer profile.

Ability to Convey Lost Value from Not Using The Product

If a company’s product is directly driving value for customers it is easy to convey the impact to customers since they stopped using the product. Periodically conveying the value lost via email can keep the product top of mind for the customer who may come back in the future.

Companies Should Focus on Retention From Day One

There are plenty of areas for early stage startup founders and employees to focus when trying to establish initial momentum. Product, hiring, and sales often take the bulk of the early team’s focus and time. The team at High Alpha realizes the importance of working toward product-market fit and its impact on future outcomes, and teams that establish sound retention practices early on can ingrain this into the company’s culture which will have positive impacts years into the future.

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